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You might have seen two sets of news reports recently that didn’t quite add up: First, President
Obama called for the liquidation of Fannie Mae and Freddie Mac, the country’s largest guarantors of
funds for home mortgages.

A couple of days later, Fannie Mae announced its sixth straight quarterly profit and said it was
sending $10.2 billion in dividends to the Treasury. Freddie Mac also reported a hefty profit — $5 b
illion during the previous three months — and said it is providing $4.4 billion in dividends to the
government.

Wait a minute. Didn’t both companies go off the rails just before the housing bust, investing in
subprime and other loans that contributed to the severity of the bust?

No question. But here’s the point: The president and congressional critics want to dismantle
Fannie and Freddie, but what’s to replace them? That’s a thorny political thicket. Not only is
there no consensus on how to do it but also little discussion of the potential costs for homebuyers
and homeowners. What would the end of Fannie and Freddie mean to consumers?

Start with higher mortgage interest rates. Without the federal guarantees supplied by Fannie and
Freddie, the costs of mortgages are virtually certain to rise. Economists at Moody’s Analytics
estimate that dumping the companies and switching to a plan advocated by Sens. Bob Corker, R-Tenn.,
and Mark Warner, D-Va., “would increase the interest rate for the average mortgage borrower” by
one-half to three-quarters of a percentage point.

The Corker-Warner plan would usher in a mortgage marketplace heavily dominated by big banks and
their Wall Street partners. There would be no direct federal guarantee on mortgage securities,
which Fannie and Freddie currently provide. The primary risks would be assumed by lenders and
investors. There would instead be a federal backstop insurance arrangement where investors could be
covered in the event of catastrophic losses caused by an economic meltdown.

The takeaway on all this: Fannie and Freddie have had their problems, but they’re now pulling in
big bucks for the Treasury and still backing the bulk of American home loans under tight federal
oversight. What replaces them matters. Dumping them precipitously in favor of a totally privatized
mortgage market might sound attractive, but it would mean you would almost certainly pay more for a
loan.